US bank stocks are flying high, and next week's earnings could give investors more reason to be optimistic about the sector. Strong results from JPMorgan Chase & Co on Friday bolstered expectations for top US banks, many of which are due to report next week, including Citigroup and Goldman Sachs.
Financials have been among market leaders in the recent rally, with the Standard & Poor's 500 posting its seventh straight week of gains on Friday. While the earnings outlook is keeping alive hopes that stocks have more room to run higher, the rise in bank shares has pushed sector indexes to near resistance levels, which could signal a rest stop for the shares in the holiday-shortened week.
The market will be closed Monday in observance of Martin Luther King Jr Day. JPMorgan Chase on Friday reported profit and revenue that were stronger than analysts had expected, and the CEO said the bank could start to increase its dividend once regulators give the go-ahead, likely at the end of March.
Analysts said the news bodes well for other financials, most of which are due to report results next week. "Financials could very easily be one of the real darlings of this particular earnings cycle," said Burt White, managing director and chief investment officer of LPL Financial in Boston.
Financials are projected to have by far the highest growth rate in earnings for the fourth quarter, largely because of easy year-ago comparisons, according to Thomson Reuters data.
Overall, S&P 500 earnings are expected to have increased by 32 percent from a year ago, the data showed. Besides the banks, economic bellwether General Electric as well as marquee tech names Apple, Google and eBay are due to report.
Investors have been keen for news on when bank dividends will be reinstated, and when it happens, it's going to mean more investment in financials, White said.
"Once they start (paying dividends) you're going to see an enormous amount of buying from yield-starved investors, as well as funds and ETFs (exchange-traded funds) that really are going to have to relook at the landscape and put financials back in there," he said.
Among other top banks reporting next week are Morgan Stanley, Bank of America and Wells Fargo & Co. The sector is benefiting from a steepening bond yield curve, which lets banks make more money on loans; a pickup in merger and acquisition activity, and a decline in loan losses, analysts said.
To be sure, though, the recent sharp rise in the sector could make it tougher for those shares to keep rallying. The KBW Bank index, trading at about 54, is up 18 percent since the end of September.
It's approaching a strong resistance area between 57 and 59. Worth noting: The KBW Bank index, the S&P financial sector and the Select Sector SPDR financial ETF all are near multi-month highs from last April.
The S&P 500's 7-week run of gains also serves as a sign that a pullback could be in store for stocks, analysts said. The last time the benchmark rose eight or more weeks in a row was a nine-week run between November 2003 and January 2004, according to Reuters data. The S&P 500 is up 13.3 percent since the end of September. Data from Thomson Reuters StarMine also suggests most banks could likely miss earnings expectations, based on the most recent and most accurate estimates.
Its estimate for Goldman Sachs is 0.2 percent below the consensus estimate, as calculated by Thomson Reuters. Similarly, StarMine's estimate for Bank of America is 0.4 percent below consensus, while Citigroup's is in line with consensus.
StarMine's estimate for Wells Fargo, meanwhile, is 0.2 percent above the consensus. Reuters Quantitative Analyst Mike Tarsala said weak trading revenues could be among factors hampering banks' fourth-quarter results.
But the bias for now seems to be to the upside for banks, other analysts said.
Besides the benefit of the steeper yield curve, "there's an expectation of better economic activity showing up in the GDP data, which will then speak to the fact that perhaps the banks' lending profile" is improving, said Joseph Battipaglia, market strategist at Stifel Nicolaus, in Yardley, Pennsylvania.
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